Opinions

Taxing questions and billion-dollar decisions confront Alaskans

The difference between a 4.5 percent withdrawal rate from the Permanent Fund and a 5.25 percent take may sound like a small matter but billions of dollars could hide between those numbers.

A quarter-percentage point represents about $125 million a year.

Alaska is reaching a turning point with the Permanent Fund. The $56.4 billion account has surpassed oil to become the largest and most dependable source of state revenue. It's apt to stay that way.

The Legislature is likely to approve a plan this year to set a percentage rate withdrawal from the Permanent Fund to pay for dividends and government operations.

Using the fund to help pay for government operations is in keeping with the reason that many of us who voted in 1976 supported the constitutional amendment to create the fund.

The essential question is how much can safely be withdrawn while preserving the account. The percentage is worth close attention because a slight change translates into billions of dollars over decades.

The structure of the Permanent Fund, in terms of the constitutionally required split between earnings and principal, made sense nearly four decades ago when Alaska leaders limited the fund to predictable investments, like U.S. Treasury bonds.

The fund today is diversified across a range of investments that are not nearly as predictable but often more profitable. In the first six weeks of this year, the fund gained $1 billion.

The enormous pots of money in the account identified as $45 billion in "principal" and more than $10 billion in the "earnings reserve" should not be measured independently but in combination, which is what counts in a diversified fund.

The only sensible means of deciding how much to withdraw from the fund each year is by a percentage of market value.  The current system can be manipulated to pump up immediate earnings, which contradicts permanency.

Awaiting the day when a constitutional amendment allows a modern investment structure, the only course is to set a maximum percentage withdrawal rate of the total market value. This can be done by law and comply with the Alaska Constitution.

A higher percentage payout would limit future growth and make current decisions on taxes, dividends and spending easier. It would make those decisions harder for the generations ahead.

Future earnings and inflation rates are unknown but consultants and state officials are saying that a withdrawal rate of between 4.25 percent and 5.25 percent is reasonable.

The options on the table in Juneau now range from 4.50 percent to 5.25 percent. Going lower or higher would create problems. Gov. Bill Walker has proposed a 5.25 percent withdrawal, but with a five-year average the effective rate would be closer to 4.7 percent of the 2017 value.

Withdraw money at a higher rate, say 6 percent a year, and the chances increase that the fund will lose value over the long term by not keeping up with inflation.

Withdraw money at a lower rate and the long-term payout of the fund — when measured over decades — will increase because the fund will be larger in the future. But that would mean higher taxes and more spending cuts now.

We are embarking on a balancing act in which the needs of the present are weighed against the needs of the future.

There are plans in the House, the Senate and from the governor that vary somewhat in the withdrawal percentages and how the money would be split between dividends and government expenses.

Under these options, there would still be a deficit of $1 billion or more.

That's more manageable than $3 billion, but it can't be solved by imaginary budget cuts legislators can't stop talking about and can't identify, or by pretending the problem will go away.

It requires a balanced approach and taxes.

Columnist Dermot Cole can be reached at dermot@alaskadispatch.com. 

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.

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